To investors including KKR & Co. and Steven Cohen’s Point72 Asset Management, Laureate Education Inc. has been a star student in the struggling class of for-profit colleges. Now, as the world’s largest higher-education company prepares for an initial public offering, two new report cards have given its biggest U.S. school some poor grades.

The studies, which use repayment data to see how borrowers are handling their federal student debt, show that students who attended Laureate’s Walden University are failing to make progress paying off their loans. That means taxpayers could be on the hook.

While Walden’s default rates are below the national average, former students have accumulated the second-highest amount of federal loans of any U.S. school, according to one of the studies, from the Brookings Institution. With a record 4 million federal borrowers nationwide signed up for programs that reduce their monthly payments based on income and can lead to debt forgiveness after 20 years, default rates may understate the risk that students will fail to repay the government.

“These particular types of schools may be taking advantage of the broad public policy that says you don’t want to hold students with these debts forever, and benefiting financially from the generosity of the American taxpayer,” said Kevin Kinser, an education professor at the University at Albany whose research focuses on for-profit schools. “Just because it seems like a good deal to investors, that doesn’t make it necessarily a good deal for taxpayers and students.”

Default Rates

Walden President Jonathan Kaplan said his school isn’t taking advantage of federal loan programs and that default rates are a better indicator of success than repayment data. Walden’s default rate of 6.8 percent as of September for students who graduated or dropped out three years earlier is considerably lower than the national average for all schools of 11.8 percent and 15.8 percent among for-profit schools.

The repayment data “simply doesn’t reflect our performance as a university,” Kaplan said. “If policymakers are concerned about the impact of income-driven repayment plans on taxpayers, they need to address it directly and ensure that students’ needs are met.”

Students in the U.S. and their parents have accumulated almost $1.2 trillion in federal education debt. Income-based repayment programs, encouraged by the Obama administration, are designed to prevent credit-scarring defaults for struggling borrowers by allowing smaller payments. The Congressional Budget Office said this year that for loans originated in 2015 and after, the plans are expected to cost the government at least $39 billion over the next decade.

Borrowers can have low default rates and low repayment rates if they use the plans, which allow them to take more time to pay than the standard 10 years. They also could enter forbearance or deferment programs, which suspend payments as interest accrues.

College Scorecard

The U.S. Education Department acknowledged the limitations of default data when it released its “College Scorecard” in September. It noted in the methodology section that the rate is “susceptible to gaming behavior that may push students toward forbearance and deferments, meaning they stay out of default but don’t make progress on repaying their loans and may continue to accrue interest.”

Laureate has fared better than other for-profit education companies in an industry tainted by allegations of preying on low-income students and saddling them with debt. Operating largely outside the U.S., Laureate, which until April listed Bill Clinton as honorary chancellor, advertises itself as a “trusted partner to universities and governments.” It took the unusual step of incorporating as a public-benefit company committed to having a “positive impact on society,” announcing the change the same day it filed for an IPO.

The two new studies of federal debt raise questions about that public benefit in the U.S. One, the Education Department scorecard, reported that 44 percent of Walden undergraduates have repaid at least $1 of the principal balance on their federal loans within three years of leaving school, compared with the national average of 67 percent. The other, from Washington-based research group Brookings, showed that 39 percent of students who left Walden in 2009 owed more money five years later.

“This new data would show that Laureate is not meeting its mission, unless it intends to do a turnaround quickly,” said Alicia Plerhoples, a law professor at Georgetown University who has studied public-benefit corporations. “This is where shareholder value and student stakeholder value are at odds.”

Clinton Role

Laureate’s IPO and heightened interest in the company may come at an awkward time for Democratic presidential candidate Hillary Clinton, who has been critical of for-profit schools. Laureate paid her husband almost $16.5 million during his five years as chancellor, according to tax returns filed with Clinton’s campaign.

A spokesman for Bill Clinton declined to comment. The former president’s office said in April that his departure had nothing to do with his wife’s campaign and came at the end of a five-year term. Hillary Clinton’s campaign didn’t respond to requests for comment.

With 1 million students, Laureate is the largest for-profit educational firm by enrollment and revenue. The Baltimore-based company, which operates 88 campuses in 28 countries, and offers online degrees, was taken private in a $3.8 billion management-led buyout in 2007. It’s pursuing an IPO as soon as early next year and planning to raise as much as $1 billion, according to people with knowledge of the matter.

Laureate, which had $4.5 billion of revenue in the 12 months ending in June and operating losses since at least 2010, had $4.7 billion of debt, according to its Oct. 2 IPO filing. Sarah Lubman, a spokeswoman for Laureate, said the company couldn’t comment because of the IPO. Spokesmen for investors KKR and Point72 declined to comment.

B Lab

Laureate has hired an outside firm, B Lab, to evaluate its “public-benefit purpose” with an assessment that includes student outcomes.

“Laureate has agreed, in an industry that has come under much scrutiny, to live to a higher standard of accountability and transparency,” said Bart Houlahan, a co-founder of B Lab, whose company is in the process of completing the assessment.

Laureate has said the Obama administration’s scorecard paints an incomplete picture because it only tracks undergraduates, and 85 percent of Walden’s students are in online graduate programs in disciplines such as education and nursing, according to the company. Most of them are working professionals in their late 30s and early 40s looking to earn an academic credential, Kaplan said. Minneapolis-based Walden, with 52,000 students, is the biggest of Laureate’s five U.S. schools.

While only about 5 percent of Laureate’s total enrollment is in the U.S., and about 10 percent of its total revenue comes from federal student loans and grants, the company acknowledged the scorecard in its IPO filing.

“To the extent such data gives rise to negative perceptions of our U.S. institutions or of proprietary educational institutions generally, our reputation and business could be materially adversely affected,” the company said.

Brookings Report

The Brookings report, released in September, used federal data to look at how both undergraduate and graduate students are handling their debt.

The study, whose lead author is Adam Looney, deputy assistant secretary for tax analysis at the U.S. Treasury Department, showed that Walden students who left in 2009 on average hadn’t reduced the total balance of their loans by 2014. By comparison, the same cohort of students nationwide had paid down about 19 percent of their aggregate balance.

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The study examined a sample of 4 percent of all federal student borrowers since 1970, using loan data and tax records that don’t identify individuals. It showed that 120,000 Walden students had accumulated about $9.8 billion in federal student loans as of 2014, the second-largest amount of any U.S. school, behind only the University of Phoenix, whose 1.2 million borrowers have $35.5 billion in outstanding debt.

Graduate students can borrow the entire cost of attendance, including living expenses, while most undergraduates are limited to between $5,500 and $7,500 of federal loans annually. Walden topped all U.S. schools in graduate borrowing in the last academic year, according to the most recent Education Department data.

Student Outcomes

About 80 percent of Laureate’s 2014 revenue came from students who pay tuition themselves, according to the company’s IPO filing.

Students who attended Walden as undergraduates and received federal financial aid had median annual earnings of $54,900 a decade after entering the school, higher than the national average of $34,300, according to the scorecard.

Kaplan, Walden’s president, said the school’s low default rate shows it is a good steward of federal financial aid. That also was the conclusion of a 2012 report about for-profit schools by Tom Harkin, the now-retired Iowa Democratic Senator, which described Walden’s performance as “perhaps the best of any company examined.”

The school’s default rate was one of the only metrics available at the time, said Elizabeth Baylor, a former investigator for the Senate Committee on Health, Education, Labor and Pensions, which issued a report. The new repayment data is a better measure, she said.

“Repayment rates give a better and more complete picture of how the majority of students are doing,” said Baylor, now director of postsecondary education at the Center for American Progress, a Washington research group. “A large number of students are not actually making economic gains that allow them to repay their debt, and that’s concerning.”